Some Deutsche Bank Clients Said to Cut Collateral on Trades

A number of funds that clear derivatives trades with Deutsche Bank AG have withdrawn some excess cash and positions held at the lender, a sign of counterparties’ mounting concerns about doing business with Europe’s largest investment bank.

While the vast majority of Deutsche Bank’s more than 200 derivatives-clearing clients have made no changes, some funds that use the bank’s prime brokerage service have moved part of their listed derivatives holdings to other firms this week, according to an internal bank document seen by Bloomberg News. Millennium Partners, Capula Investment Management and Rokos Capital Management are among about 10 hedge funds that have cut their exposure, said a person familiar with the situation who declined to be identified talking about confidential client matters.

The hedge funds use Deutsche Bank to clear their listed derivatives transactions because they are not members of clearinghouses. Millennium, Capula and Rokos declined to comment when contacted by phone or e-mail.

“Our trading clients are amongst the world’s most sophisticated investors,” Michael Golden, a spokesman for Deutsche Bank, said in an e-mailed statement. “We are confident that the vast majority of them have a full understanding of our stable financial position, the current macroeconomic environment, the litigation process in the U.S. and the progress we are making with our strategy.”

The lender’s New York-listed shares fell as much as 6.5 percent as of 12:53 p.m. local time.

Deutsche Bank’s stock and debt have been under pressure after the U.S. Justice Department requested $14 billion to settle an investigation into residential mortgage-backed securities. That’s not far from the Frankfurt-based company’s current market value of 15 billion euros ($16.9 billion). Credit-default swaps protecting Deutsche Bank bonds surged to a six-month high earlier this week, according to data compiled by CMA, while the stock hit a record intraday low of 10.18 euros.

Political Pressure

The financial pressure on the lender is also spilling over into German politics, stirring speculation Chancellor Angela Merkel’s government might be forced to offer support. Chief Executive Officer John Cryan told Bild newspaper this week that government aid was “out of the question.” Any taxpayer-funded solution for the bank’s troubles would be Merkel’s downfall, according to the leader of Germany’s biggest opposition party.

The International Monetary Fund in June said Deutsche Bank may be the biggest contributor to risk among so-called global systemically important banks. The bank has gross notional derivatives exposure of 46 trillion euros, according to an Investor Relations presentation published this month. After netting and collateral, reported derivative trading assets fall to 41 billion euros, the bank said.

“The issue here is now one of confidence,” said Chris Wheeler, a financial analyst with Atlantic Equities LLP in London. “That’s what’s going on here. The thinking is ‘Deutsche Bank is fine, but there’s a slim chance it might not be, so why leave my money in there?’”

Clients review their exposure to counterparties to avoid situations like the 2008 collapse of Lehman Brothers Holdings Inc. and MF Global’s 2011 bankruptcy when hedge funds had billions of dollars of assets frozen until the resolution of lengthy legal proceedings.

In a memo to staff outlining how to deal with client inquiries, dated Sept. 27, the bank said that customers broadly understand that “CDS are no longer a necessarily accurate reflection of counterparty risk,” according to a copy seen by Bloomberg. The bank’s funding costs have remained lower than CDS spreads indicate this year, according to the note, and liquidity reserves are more than three times higher than in 2007.

Insurance Sale

Investor concerns eased on Wednesday after Deutsche Bank agreed to sell its Abbey Life insurance operations for 935 million pounds ($1.2 billion) and Cryan ruled out a capital increase. The shares rose 2 percent that day and senior CDS fell 17 basis points to 232 basis points. On Thursday, the stock in Frankfurt gained another 1 percent to 10.875 euros and the CDS dropped to 227 basis points.

Deutsche Bank has long struggled to adapt to an era of tougher capital requirements and diminished trading revenue. The pressure has intensified since mid-September, when the U.S. Justice Department’s $14 billion demand was revealed. Deutsche Bank has said it expects to whittle down the settlement amount, as other Wall Street banks have.

A number of funds that clear derivatives trades with Deutsche Bank AG have withdrawn some excess cash and positions held at the lender, a sign of counterparties' mounting concerns about doing business with Europe's largest investment bank.While the vast majority of Deutsche...